Choice Hotels International, Inc. (CHH) could be looking to acquire Wyndham Hotels in a deal that would create one of the US’s biggest budget hotel chains, The Wall Street Journal reported on May 23.
While CHH is not commented, analysts at UBS pointed out that it wouldn’t be the first time the group has turned to acquisitions to grow, acquiring about half of the 22 brands it owns today.
Unit growth has been challenging, the analyst noted, with the group guiding to 1% unit growth this year in its “revenue-intense” categories that include the Upscale, Midscale and Extended Stay segments. Further down the value chain, declines in the Economy segment which makes up 14% of domestic rooms, could result in overall unit growth decline.
CHH's domestic portfolio declined -1.2% in 2021 and in order to grow in 2022 they acquired Radisson, but growth through acquisition is not the same as franchise unit growth that has no capital investment required, the analysts said. Without Radisson, its unit growth would have declined by 3% year-over-year in 2022.
“The focus on Economy would be a departure for CHH given it has talked about its focus on higher-revenue segments,” the analysts wrote.
“CHH has pointed out that +1% unit growth in the Upscale segment is worth $4.5 million in fee revenue, while +1% in Economy units is only $400,000 in fees. CHH has also pointed out that the Economy segment hasn’t grown since the financial crisis of 2009. So even though it could represent a departure from CHH's recent strategy, it could still in theory provide growth.”
The analysts said selling, general, and administrative expenses (SG&A) expenses for a franchise company typically can be reduced significantly, and CHH plans to reduce Radisson's SG&A by roughly 70%.
UBS has a ‘Neutral’ rating and a $122 12-month price target for Choice Hotels International.
Its shares were 0.8% up at $117.68 shortly after midday on Wednesday.
Contact the author at stephen.gunnion@proactiveinvestors.com